How Americans are becoming more financially responsible

At least once a week, 24-year-old Eric Recker opens an Excel spreadsheet to check his budget. After graduating from Michigan State in 2011 with student loan and credit card debt, Recker knew he needed to be strict with his money.

Now, two years later, he's paid off his credit cards and two student loans. He also puts 15 percent of his paycheck into savings and contributes to his retirement account. While he’s not taking fancy trips or eating out every night, by sticking to his budget he gets to enjoy small pleasures, like going to see his favorite team, the Lions, play the Bears on Sunday.

“I realized I had money to go to the game because I stuck to my budget,” he said. “I do stuff, but I try to be frugal about it while still being able to enjoy myself and not be anti-social. That can be tough line to walk, but it makes the rest of the month worth it.”

Recker is not the only one working to shed his debt load and become financially secure. Since the recession began, Americans on the whole have started engaging in more financially responsible behaviors. According to a recent study from the Federal Reserve Bank of New York, overall household debt declined by $78 billion last quarter, putting it 12 percent lower than its highest levels in fall 2008 and at its lowest level since 2006. And among young people, savings have increased.

“A couple of silver linings have come out of the recession, even though it was very harrowing time to live through,” said John Sweeney, the executive vice president of Retirement & Investing Strategies at Fidelity Investments. “We saw some changes in behavior — reducing debt, increased saving for retirement — that tend to be lasting structural trends.”

While it is going to take a balance of borrowing and savings to create long-term financially stability, experts say there are positive signs that Americans have learned financial lessons from the recession.

Responsible behaviors

Since the depths of the recession, Americans have become more frugal. Overall, household debt has been on the decline, while mortgage balances and credit card debt have shown major reductions. Americans' credit card debt remains 16.5 percent below its July 2008 peak, according to the Federal Reserve. And New York Fed data showed housing debt has come down to $8.38 trillion from $9.99 trillion in mid-2008, a 16 percent drop.

Another good sign that Americans are getting on stronger financial footing is the decrease in delinquency rates — that is, people are actually managing to pay back the debts that they do have. Current delinquencies on mortgages are nearly 26 percent lower compared to the same time last year, according to a TransUnion study. Even in areas where debt levels are growing — student loan debt and car debt — the delinquency rate on both of those types of debt has declined since June, according to New York Fed — which is a sign of more stability in the job market and personal finances.

In tandem with paying down of debt, Americans are now feeling better about their economic situations since the recession began. A survey of investors done by Fidelity Investments found that people are becoming more confident and prepared for bumps in the road. When the financial crisis started, 64 percent of investors reported they were either scared or confused about their financial futures, while 45 percent indicated they were prepared or confident. But today, the situation is almost reversed, with 61 percent saying that they currently feel confident or prepared and 45 percent feel scared or confused.

And in a positive feedback loop, those that have become more confident are engaging in positive investing behaviors like increasing savings, decreasing their debt, and starting an emergency fund. Sweeney said these behaviors are particularly promising because they tend to be long-term changes.

“We find when people change their savings rate, tends to be permanent behavior,” he said. “Reducing personal debt also tends to be structural change. These are very positive trends.”

Finding balance

While a renewed focus on paying off debt may sound like a good thing, it can also hamper economic growth in the short-term. When people spend their wages paying off debt, they are spending less in the marketplace.

“We’re seeing a lot less spending on restaurants, expensive groceries, new clothes — things that aren’t necessities,” said Michael Bapis, a financial adviser and managing director with the Bapis Group at HighTower Advisors, an investment management group based out of New York and Utah. “It’s probably bottomed out, but you’re still not seeing strong growth in any of those spaces. And it’s kind of a Catch-22. It’s obviously a balance. But this could be causing the economy not to bounce back as quickly as it could.”

An April study from the New York Federal Reserve indicated that while debt reduction has likely helped household balance sheets, it has also likely contributed to slow consumption growth since the beginning of the recession. The study concludes that “the trajectory for consumer indebtedness has important implications for consumption and economic growth going forward.” In other words, not all debt is evil, and it can be an important economic driver.

But how Americans balance their debt loads and take on lower interest rate debt is what leads to financially stability over the long term, Sweeney said.

“You want healthy levels of debt and a sustainable growth rate,” he said. “If you have a mortgage payment you’re not stressed about, that’s a good use of borrowing, but when you’re putting a meal that lasts one evening on a credit card paid for over multiple months or years, it’s not a good use of borrowing. It’s not sustainable.”

Experts also agree that Americans need to not panic and rush into conservative investments like bonds just because the recession has made them more risk-averse. Such a strategy may actually increase exposure to additional risk. “We could be in the biggest bond bubble in history because of people’s fear. But we have it in our minds that bonds are safe,” Bapis said.

Sweeney suggested investors keep money diversified, even if they are near retirement age. While the temptation is to go solely into bonds, he said keeping money in the stock market over the long term in addition to bonds and cash is the best strategy to ride out periods of recession. “You want people to have a balanced boat not running from one side of the boat to the other,” he said.

A new generation of savers

Eric Recker is not alone among his peers in paying more attention to his personal finances. The lessons of the recession have particularly been striking home for the Millennial generation. According to a recent study by Moody’s Analytics, the savings rate among young people has jumped dramatically from 2006, where it was at a dismal negative 16 percent, to the present 2 to 3 percent. Even with their debt loads higher than other generations, the under-35 crowd is now saving about as much as people 35 to 44 and nearly as much as those between 45 and 54.

“One of the brighter spots coming out of the downturn was the Gen Y saver feels much more knowledgeable and has a much more positive outlook than other investors,” said Sweeney.

He added that behaviors like the ones Recker has — automatically saving 15 percent of income, paying off credit card debt and increasing retirement contributions — are hugely important for young people to create economic stability.

Young people are tending to turn to the Internet and their community to learn about budgeting and saving habits. Recker sees he has gotten financial advice from his dad, and community support for budgeting and saving among his peers, even if most of his associates don’t take it quite to the extreme spreadsheeting that he does.

“People my age are definitely conscious of it, and there’s an awareness out there of budgeting and saving,” he said. “It helps to have other people in the same mindset. We all look out for each other.”